Economics of the EMU
What is happening to the Eurozone?
Since the first debates on the European Economic and Monetary Union decades ago, the major challenge for the countries involved has been to adjust to asymmetric shocks without a flexible nominal exchange rate ( Gros 2010 ). In the early debate it was stressed that the Eurozone scores less well compared with other monetary unions, notably the US, in terms of wage and price flexibility.
Eurozone leaders embraced two bold moves in May – a Greek bailout worth €110 billion, and a Special Purpose Vehicle to fund future bailouts up to €750 billion (counting the IMF’s maximum contribution)--enough to refinance Irish, Portuguese, and Spanish public debt needs for a couple of years.
The current European economic governance needs reform.
After months of negotiations at all levels, including the Van Rompuy task force and sharp statements by the German government, the Commission has put forward its proposal to reform the Stability and Growth Pact. The ball is now in the court of the Council of Finance Ministers who, in all likelihood, will give their blessings to the proposal, at least to its core. The Commission, at long last, admits that there was something wrong with the pact, including after the 2005 revision that it had previously described as nearing perfection.
The European Commission has presented its proposals to strengthen the Stability and Growth Pact (SGP). If accepted by the Council, this will be the third version since the start of the Eurozone.